The new packaging norms that will kick in from November 1, will push up product prices. The reason: Companies no more have the window available to tweak grammage in the event raw material prices shoot up. This will mean companies will have to increase product prices to avoid eroding margins in the future.
While firms such as Godrej Consumer Products Ltd (GCPL) and Dabur India Ltd said they saw no immediate impact on pricing, the fact remains that most are bracing for a situation where input prices begin to pinch.
On an average, commodity prices have remained volatile in the last six-to-eight months as crude oil and agri-inputs have fluctuated. This has put pressure on companies whose emphasis has been largely on volume growth. In the last few quarters alone, most fast-moving consumer goods (FMCG) companies have seen revenue growth in excess of 15 per cent, driven mostly by volumes. Price-led growth, in contrast, has been in the region of five-seven per cent only.
Companies have said their pricing strategy has been cautious so far to avoid adding to inflationary woes. But analysts say they may no longer be able to resist price rises. "I foresee a situation where product prices will shoot up," says Pravin Kulkarni, general manager (marketing), Parle Products, which ranks up the top biscuit makers in the country. This point is endorsed by Kaustubh Pawaskar, FMCG analyst at brokerage Sharekhan: "Yes, price hikes could happen, not immediately, but going forward."
Biscuits is one among 19 product categories that will be affected, thanks to the new packaging norms. These norms, which were first notified last year by the Consumer Affairs Ministry and were to kick in by July, were eventually postponed because of intense lobbying by FMCG companies.
The norms make it mandatory for players to pack items in standard sizes only.
In the case of biscuits, soaps, coffee, tea and beverages, pack sizes start from as low as 25 grams going right up to 1 kg. In some other categories such as branded rice and flour, for instance, pack sizes start from 100 grams going beyond 5 kg, while in the case of detergents and laundry soaps, the minimum pack size is 50 grams.
The new norms, however, have exempted small packs giving players some legroom. Says P Ganesh, chief financial officer, GCPL: "Certainly it does bring some relief to players with small packs not falling under the norms."
Typically, value packs, which fall in the Re 1 to Rs 10 price range, constitute about 25-30 per cent of overall sales for an FMCG company. In the case of biscuits, it could be higher at about 55-60 per cent since the category as a whole is regarded as a low-value item.
Nevertheless, the move not to standardise small packs will help companies, say analysts, since they act as recruiter packs, that is, entry-level products that help consumers get familiar with the brand. This is critical, they say, because introducing standard packs at the entry-level could lead to odd pricing, discouraging consumption.
